What is the difference between the FHSA and the HBP?

The federal government is launching a new savings vehicle: the tax-free first home savings account, or FHSA. It allows future buyers to save $40,000 tax-free. So, FHSA or HBP? Which one is right for you? We can help you figure it out.

What is the FHSA?

The FHSA, a tax-free savings account for first-time homebuyers, will come into effect on April 1, 2023. Allowing first-time buyers to save up to $40,000 tax-free, this new product combines the benefits of an RRSP and a TFSA. Contributions are tax-deductible, as is the case with an RRSP, and the amounts are not taxed on withdrawal, as is the case with a TFSA. Another benefit of the FHSA: Funds that are withdrawn will not need to be repaid.

Who is eligible for the FHSA?

• The taxpayer must be a Canadian resident between the ages of 18 and 71.
• The taxpayer or the taxpayer’s spouse must not have been an owner-occupant of a residence in the year the account is opened or in the four preceding calendar years.

Under what conditions can I make an FHSA withdrawal?

• The FHSA can only be used only once and only for the purchase of a first home or the construction of a home.
• A written agreement to purchase or construct a home must be in place by October 1 of the year following the year of withdrawal.
• The buyer must occupy the home as his or her principal residence within one year of purchase or construction.

How do I contribute to an FHSA?

• The annual contribution limit is $8,000, with a lifetime limit of $40,000.
• The account can remain open for a maximum of 15 years.
• Contributions to the FHSA must be made by December 31 for current-year deductions, unlike the RRSP which allows contributions within the first 60 days of the following year.

Are FHSA withdrawals taxable?

Funds withdrawn from an FHSA are not taxable, provided they are used to purchase a first home. If the FHSA is not used for a first-time home purchase, the funds can be transferred to an RRSP tax-free.

What is the HBP?

The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from an RRSP tax-free when you buy your first home. In the second year after the year of withdrawal, you will have to start paying back the funds withdrawn. Payments must be made over a maximum of 15 years, with annual payments of at least 1/15 of the amount withdrawn.

What are the prerequisites for the HBP?

• You have to open an RRSP, which means you must be a Canadian resident 18 years of age or older.
• The HBP is applicable for the purchase or construction of a first home, with a written agreement in hand.
• For an RRSP contribution to lower your income for a given taxation year, it must be made by March 1 of the following year.

How do HBP withdrawals work?

• The funds to be withdrawn must be deposited in the RRSP at least 90 days before the HBP.
• The HBP must be executed within 30 days following the deed.
• If the HBP is cancelled, the funds withdrawn from the RRSP will not be taxed, but they must be repaid by December 31 of the year following the withdrawal.
• A new HBP is permissible if the previous one is fully repaid before January 1 of the year of the next withdrawal.

FHSA or HBP: Which one should you choose?

The FHSA is an attractive product for young workers and people who have never been homeowners. It should be considered for a longer-term project.

Choose the FHSA when the following is true:

• You are planning to buy your first home in more than five years
• You intend to make annual contributions of less than $8,000
• You plan to withdraw more than $35,000 for a down payment

If you already have funds invested in an RRSP, the HBP may help you accumulate a down payment more quickly than the FHSA.

Choose the HBP when the following is true:

• You are planning to buy a home in the near future
• You are able to contribute more than $8,000 per year

You cannot make both an FHSA withdrawal and an HBP withdrawal for the same purchase.

How can I help my child buy his or her first home with an RESP?

Why not turn an RESP project into a “first home” project for your child? When your child enrols in post-secondary studies, he or she will be eligible for EAPs (educational assistance payments), which are made up of grants and accumulated income. The principal of your RESP (the contributions) will belong to you. It’s a good idea to leave it in your RESP as long as possible so that it continues to generate tax-free income. If you have unused contributions remaining when your child graduates, you can withdraw them and transfer them to your child for deposit into his/her FHSA. A great way to support your child in the next phase of his/her life!

Contact our team for more information about RESP withdrawals and your options!

Both the FHSA and the HBP have unique tax advantages. Your choice will depend on your ability to save, your financial situation and when you plan to buy your first home!